FPIs control a third of trade float; stand essential for India’s goal of reaching $10 trillion market

As per the latest business developments, While domestic mutual funds have absorbed much of the foreign investor outflows, institutional leaders at the Global Fintech Fest stressed that FIIs/FPIs stay essential for India to achieve its $10 trillion market-cap ambition.

Foreign portfolio market participants hold roughly a third of India’s actual free-float stock and are critical to doubling market capitalisation from $5 trillion to more than $10 trillion, stated Arun Kohli, Managing Director and Head of India at Morgan Stanley.

“The Indian market has a total market cap of $5 trillion, but more than half is owned by promoters, which is not really liquid. If you think around the liquid stock, foreign market participants own one-third of it and are very important providers of liquidity.”

Kohli further noted that FIIs and DIIs should not be noted as opposing forces that simply offset each other; they are complementary.

“If we go from 5 to 10-plus [trillion], we will need a lot of fresh capital,” he stated.

Against this backdrop, Kohli highlighted the trends shaping cross-border portfolio allocation, particularly the stark earnings disparities fuelled by the global AI boom.

“India’s earnings expansion this year will be around 12%, while South Korea’s earnings expansion is more than 300%,” he noted.

Even so, foreign ownership value has quadrupled in indian rupee terms during the past decade, with offshore funds remaining key anchor buyers in IPOs, block trades and qualified institutional placements (QIPs).

Alex Bruce, Head of European Public Policy at Vanguard, further noted that the surge in domestic retail flows actually reinforces, rather than replaces, global passive appetite.

“Index inclusion is important, but ultimately it is a reflection of deeper market fundamentals rather than the driver itself,” Bruce stated. “Stronger household participation creates deeper markets, deeper markets attract international capital, and international capital improves liquidity and capital formation: that’s a virtuous cycle.”

Bruce additionally pointed to India’s underpenetrated pension system as a multi-decade expansion catalyst. Domestic retirement assets stand at just 15 to 20% of GDP, compared with 60-100% across OECD economies.

To strengthen foreign participation, speakers urged that structural frictions be resolved. Kohli specifically called for a deeper Securities Lending and Borrowing (SLB) mechanism to expand institutional hedging options, along with broader operational alignment through standard Legal Entity Identifiers (LEIs) and automated netting systems.

State Street’s Arindam Mukherjee pointed to more evolved markets for guidance.

“Look at the Korean market, for example: this is probably a jurisdiction to look at in terms of where some policies can go,” he stated.

As global markets move towards omnibus structures, jurisdictions with capital-upside taxes increasingly handle tax processing and clearances directly through custodians or at the transaction level to reduce operational drag.

The speakers additionally flagged persistent bottlenecks around physical documentation and tax-clearance certificates. Indian authorities, they stated, need to fully automate and digitise the issuance of No Objection Certificates (NOCs) and streamline onboarding documentation, eliminating several early steps that at present slow foreign investor entry.